How Will Trade Wars Affect The Long-Term Profitability Of The Fashion Industry?

After the Chinese government took retaliatory measures against the latest round of tariff increases by the Trump administration, the US China trade war entered a full-scale combat stage in May 14th.

Beijing announced that it would start tariffs in June 1st on a range of US exports of a total value of US $60 billion, ranging from 5% to 25%.

According to the statement issued by the official website of the Chinese government, various target products, such as agriculture, metals, clothing and footwear, are on the list.

The escalation of trade wars between the world's two largest economies has opened Pandora's magic box to all sectors of two countries and even the whole world, and the future economic outlook may not be clear.

For luxury goods and fashion companies, their manufacturing cycles, from manufacturing to retailing, are increasingly dependent on China, which is painful even if it is not destructive.

In addition to Monday's global capital market turmoil, there are at least three possible ways to influence the long-term profitability of luxury goods and fashion industries:

Luxury brands in the US will be harder to sell.

First of all, luxury brands from the United States will soon feel pain.

NelsonDong is a senior partner of Dorsey&Whitney law firm of the international law firm and a current member of the board of directors of the National Committee on Sino US relations. In an interview with JingDaily, he said the United States seemed to have more advantages.

Compared with the United States, China has always been more dependent on the quantity of exports, while many of China's exports are the basic commodities used by consumer goods or other manufacturers, so it can be easily resale to other global markets, such as Africa, Latin America and Southeast Asian developing countries.

"By contrast, a large part of the US export to China is high-end products, whether they are sophisticated smart phones or complex commercial airliners," Dong said. "Therefore, the possibility of US exporters replacing China is much smaller, because China has 20% of the world's population and more wealth."

In addition, influenced by trade war, American luxury fashion brands may lose their competitive advantage with European competitors in the Chinese market.

As China begins to fight back in June, many American brands are facing pressure to raise retail prices, though this is their last resort to pass the price difference to consumers in order to offset their profitability.

For example, PatriceLouvet, Global CEO of Ralph Lauren, did not rule out the possibility of raising prices after the company's first quarter earnings announcement in May 14th.

In terms of pricing, European luxury brands are heading in the opposite direction.

Under the leadership of LouisVuitton, Gucci, Herm s and Prada, European brands have sharply reduced their retail prices in mainland China in recent years to cope with China's regulation.

Chinese consumer sentiment is affected

If things get worse, Chinese consumers will soon show their hostility towards the US.

On 5 15, Kang Hui, the anchor of the news network broadcast by CCTV, issued a 90 second statement on China's attitude towards trade war, and immediately spread to all social media platforms.

Kang said: "talk, the door is open, fight, stay in the end.

"This speech aroused public nationalism, and a large number of users expressed their support for the government's war against the United States.

At present, there is no concrete indication that this sentiment has been turned into a consumer's protest against us goods.

However, the experience of Korea and Japan, which has political disputes with China, can give us a lesson from us.

For example, in 2017, South Korea and China launched a geopolitical dispute over the issue of THAAD missile launches, which caused Chinese consumers to boycott Korean products voluntarily, which seriously affected the Korean business community, from automobile manufacturing, hairdressing, fashion to tourism.

In an anonymous interview with JingDaily, a marketing professional who worked for high-end American fashion brands admitted that the company was very concerned about the impact of the current dispute on Chinese consumers' brand enthusiasm and the possible adverse impact on the business.

Worries about currency fluctuations and growth

Although the European luxury fashion company is not at the center of the conflict, it should also pay attention to the relevant events.

The escalation of trade tensions between the US and China has brought a new round of devaluation to the Chinese renminbi, which has weakened to nearly six months after the announcement of increased tariffs in China.

In theory, the weakening of the renminbi can partly offset the effect of high tariffs.

Nonetheless, it also undermines people's purchasing power: This is bad news for luxury brands who rely on outbound Chinese tourists to grow their businesses.

Moreover, as trade wars have worsened China's economic growth prospects, many experts worry that this will add a new layer of uncertainty to the current unstable economic situation in China. No luxury brand can circumvent this influence.

So far, as the results of the first quarter profits of major luxury goods show, China's market is still exceptionally strong.

However, Mr. Dong, an international law firm, added: "it takes a couple of months for economists to measure and report the impact of this dispute based on trade data."

Therefore, for luxury brands, especially in the case of trade wars, it is urgent to work out the right strategies to cope with the potential weakness in China.